Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Germany

December 14, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The Staff Report for the 2006 Article IV Consultation with Germany is also available.

Public Information Notice (PIN) No. 06/141
December 14, 2006

On December, 6, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Germany.1


A cyclical recovery is underway with buoyant exports progressively spilling over into stronger domestic demand. Investment activity is accelerating with high corporate profits and the long contraction in the construction sector has bottomed out. Full-time employment has started to pick up for the first time since 2001, but overall consumption still remains tepid with slow wage growth.

GDP growth is projected to accelerate from 0.9 percent in 2005 to 2.5 percent in 2006 partly benefiting from the World Cup, temporary fiscal incentives, and some durables purchases in advance of the VAT hike. Growth is projected to slow to 1.5 percent in 2007, but the deceleration is likely transitory. Downside risks to the outlook relate to volatile oil prices, global monetary tightening, and if there were an abrupt unwinding of global imbalances. On the positive side, growth could accelerate if the tick up in employment were to gain further speed, thereby lifting household disposable incomes.

Labor productivity growth in the exposed manufacturing sector has improved steadily while that in the more sheltered domestic economy trails international performance. Liberal professions and crafts, and network industries, need to be further deregulated and reformed.

The financial sector has become healthier. Abundant liquidity and the cyclical upswing have improved earnings of banks and insurance companies although bank profitability still compares unfavorably with the EU average. Capital market activity has accelerated, led by increased mergers and acquisitions. There is ample scope for further growth of capital markets and in the large real estate sector which has stagnated for some time.

The government is making good progress in reducing the fiscal deficit. In 2006 the deficit will drop below the 3 percent of GDP Maastricht limit one year ahead of the schedule under the excessive deficit procedure. The reforms in health care and the corporate income tax system remain under discussion. Germany's long-term fiscal outlook is improving but aging-related fiscal pressures still need to be reduced further.

Executive Board Assessment

Executive Directors welcomed Germany's brisk cyclical recovery, which has been aided by far-reaching private sector restructuring and the authorities' decisive actions on fiscal consolidation. Directors welcomed the strengthening of investment and the early signs of a pickup in consumption, indicating that exports are spurring domestic demand.

Directors encouraged the authorities to use the economic upswing to undertake deeper structural reforms for raising Germany's growth potential. External competitiveness is strong, but the domestic sector needs to be strengthened through mutually reinforcing policies that enhance labor utilization, boost productivity, and continue fiscal consolidation, thereby also bolstering the sustainability of the welfare state.

Directors were encouraged by the resumption of growth in full-time employment. At the same time, Directors stressed that a significant and durable reduction in unemployment will require lowering reservation wages to bolster employment of lower skilled labor. Policies to increase participation rates will also help reduce structural welfare costs.

Directors supported the authorities' intention to strengthen the implementation of the Hartz IV labor market reforms. They called for tightening eligibility for unemployment benefits for those unwilling to work, and for cutting active labor market programs that are ineffective. Most Directors urged the authorities to refrain from introducing minimum wages, which could undermine job creation, and also cautioned against new wage subsidies. They also encouraged the authorities to relax the employment protection legislation.

Directors called for further deregulation of the services markets, including for liberal professions and crafts. They also saw a need to improve the contestability of markets in network industries to boost efficiency and benefit consumers. Directors supported the authorities' initiatives to cut red tape and regulatory costs.

Directors underscored the importance of an efficient financial sector to improve the allocation of capital to areas of highest return. While recognizing that earnings in the financial sector have risen, Directors noted that performance still trails that of most EU peers. They welcomed changes in the ownership structure of several public banks, but stressed that allowing a larger role for private capital to facilitate restructuring remains vital.

Directors saw the ongoing review of the supervisory agency, BaFin, as a good opportunity to buttress its operational independence. They endorsed the shift toward risk-oriented supervision.

Directors noted that the continued deepening of capital markets—which are already playing an increasing role in guiding corporate decisions—will be crucial for bolstering German growth and employment. They welcomed the authorities' intention to clarify the legal framework for private equity and to introduce Real Estate Investment Trusts, which should cover both commercial and residential property.

Directors welcomed the authorities' strong expenditure-based measures for fiscal consolidation, which will remain key to adjustment going forward. At the same time, they viewed the increase in the VAT in 2007, combined with the cut in payroll taxes, as a key structural measure that will help boost employment and strengthen the consolidation effort. Directors encouraged the authorities to cut the structural deficit by around ¾ percent of GDP in 2007 and to eliminate it by 2010, in anticipation of the pressures of population aging.

Directors considered that Germany has made substantial progress in reducing long-term aging costs, but cautioned that fiscal sustainability will not be assured even if the structural deficit were to be eliminated by 2010. Accordingly, they encouraged the authorities to pursue a broad-based approach, encompassing both fiscal adjustment and growth-enhancing reforms.

Directors welcomed the efforts to reform the corporate income tax and health care systems. They urged the authorities to implement the reforms in a manner consistent with their stated objectives of improving efficiency and lowering cost pressures without increasing fiscal risks. On the corporate income tax, a reduction in tax rates largely financed by a broadening of the tax base would be appropriate. On health care, Directors urged the authorities to tighten the reform proposals to limit rising health costs, and called for continued efforts to decouple health care financing from payroll charges.

Directors observed that Germany has spurred internal competition within the euro area and that new EU members have benefited from Germany's proximity. They noted that further successful reforms in Germany, as outlined above, would have positive spillover effects for the region and the world.

Germany: Selected Economic Indicators


2001 2002 2003 2004 2005 2006 1/ 2007 1/

Economic activity and prices

(Change in percent, unless otherwise noted)

Real GDP

1.2 0.0 -0.2 1.2 0.9 2.5 1.5

Net exports 2/

1.7 2.0 -0.9 1.2 0.4 0.8 0.4

Total domestic demand

-0.5 -2.0 0.6 0.0 0.5 1.8 1.2

Private consumption

1.9 -0.8 -0.1 0.1 0.1 1.1 0.3

Gross fixed investment

-3.7 -6.1 -0.8 -0.4 0.8 5.7 4.0

Construction investment

-4.6 -5.8 -1.6 -3.8 -3.6 3.1 2.8

Gross national saving (percent of GDP)

20.0 20.4 19.7 21.1 21.4 21.9 22.3

Gross domestic investment (percent of GDP)

20.0 18.3 17.8 17.4 17.3 17.7 18.0

Labor force 3/

42.2 42.3 42.4 42.8 42.7 42.4 42.4

Employment 3/

39.3 39.1 38.7 38.9 38.8 39.0 39.2

Standardized unemployment rate (in percent)

6.9 7.7 8.8 9.2 9.1 8.1 7.8

Unit labor costs (whole economy)

0.5 1.3 -1.7 -4.0 -3.3 -2.9 -1.5

GDP deflator

1.2 1.4 1.1 0.9 0.7 0.5 1.2

Harmonized CPI index

2.0 1.4 1.0 1.7 2.0 1.7 2.3

Public finance

(In percent of GDP)

General government balance 4/

-2.8 -3.7 -4.0 -3.7 -3.2 -2.1 -1.5

Structural government balance

-2.7 -3.2 -3.4 -3.4 -2.8 -2.3 -1.7

General government gross debt

57.9 59.6 62.8 64.8 66.4 67.2 66.9

Money and credit

(Change in percent over 12 months)

Private sector credit 5/

3.2 0.9 0.0 -0.2 2.1 4.2 ...

M3 5/

6.1 ... 3.5 2.2 5.2 3.9 ...

Interest rates

(In percent )

Three month money market rate 6/

4.3 3.3 2.3 2.1 2.1 3.3 ...

Ten-year government bond yield 6/

4.8 4.8 4.1 4.1 3.6 3.8 ...

Balance of payments

(In billions of euros, unless otherwise noted)

Exports 7/

731.1 756.2 769.6 842.5 909.0 1,019.5 1,075.0

Imports 7/

692.9 667.3 685.1 732.9 796.5 893.5 944.5

Trade balance (percent of GDP)

4.2 5.8 5.5 6.4 6.3 6.4 6.1

Current account balance

0.4 43.4 40.3 81.9 92.2 98.6 102.7

Current account (percent of GDP)

0.0 2.0 1.9 3.7 4.1 4.3 4.3

Exchange rate

(Period average)

Deutsche mark per US dollar

2.18 .... ....        

Euro per US dollar 6/

1.12 1.06 0.88 0.80 0.80 0.79 ...

Nominal effective rate (1990=100) 8/

101.5 104.7 112.6 115.8 114.7 115.6 ...

Real effective rate (1990=100) 9/

101.5 101.7 105.4 104.4 102.8 102.0 ...

Sources: Deutsche Bundesbank; IMF, IFS; IMF, World Economic Outlook; and staff projections.
1/ Staff projections, if not otherwise indicated.
2/ Contribution to GDP growth.
3/ Domestic definition on a national accounts basis; according to new integrated system of economic accounts (ESA95).
4/ On a national accounts basis; according to new integrated system of economic accounts (ESA95).
5/ Data for 2006 refer to August, 2006. M3 refers to Germany's contribution in the euro area.
6/ Data for 2006 refer to September, 2006.
7/ Includes supplementary trade items.
8/ Data for 2006 refer to September, 2006.
9/ Based on relative normalized unit labor cost in manufacturing. Data for 2006 refer to July, 2006.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100